How Will AI Affect Precious Metals Trading?

Key takeaways:

• The rise of AI is set to boost industrial demand for precious metals
• AI will enhance market analysis, automated trading, risk management
• Depth of data analysis and speed are key: AI can boost efficiency
• AI can help mining companies improve resource detection, operations

You can barely fire up a screen these days without noticing a news article or social media post highlighting the latest impact of Artificial Intelligence (AI) and what it may be capable of next. The advent of this epoch-making technology is likely to be seen as a turning point in human development, and its potential reach and transformative power are significant – even matching the birth of the internet in terms of global impact, according to some observers.

AI has the potential to transform industry and manufacturing, medicine and healthcare, transport and logistics, leisure and entertainment, education, policing, the defence industry and space exploration, to name just a few.

Among many other areas of human endeavour touched by AI, one garnering plenty of interest is commodity trading. AI is already affecting this space and its impact is likely to grow as the technology advances. So what is AI investing, and what will be the impact of AI on commodity markets? How can AI trading impact the precious metals markets? That is what we will explore in this article.

What Do Precious Metal Investors Need To Know About AI?

The impact of AI on precious metals can be considered in two distinct categories: first, the industrial demand impact that AI could have for precious metals needed in the chips and components that underpin AI systems; and second, the impact that AI can have on trading activity in the markets for precious metals. 

In short, AI is boosting industrial demand for precious metals, as well as changing the way these metals are traded.

How Has AI Influenced The Metal Commodities Market?

The growth of AI creates demand for physical infrastructure, and this includes computer systems with increasing capacities, more advanced servers and switching technologies. As a result, demand is expected to rise for platinum alloys used in chip manufacturing, silver-palladium for multi-layer ceramic capacitors (MLCCs) in high-end computer systems, gold wire in chips and memory units, and gold plating in printed circuit boards, according to a Reuters article quoting research consulting group Metals Focus.

The World Gold Council has also referred to the impact on gold from the global boom in AI, which it believes is set to continue in 2024.

The second impact of AI on metals is its potential to affect market analysis and the trading of the commodities themselves. This includes the use of widely available AI systems in trading strategies among retail investors, and more advanced AI systems used by institutional investors. AI systems can be used for their ability to process vast amounts of data to analyse supply and demand fundamentals and help determine entry and exit points in the markets, improve risk-management strategies, or to help craft a wider strategic portfolio of investments that may include precious metals among other assets.

What Effect Has AI Already Had On Precious Metals?

AI’s capabilities include image and speech recognition, natural language processing, problem-solving and decision-making. These attributes mean AI can be used to help to analyse data, produce price forecasts, automate trading and manage risk in commodity markets.

Artificial Intelligence’s key advantages over human analysis and trading are speed and efficiency, but it may also be able to identify hidden patterns in the data that humans could miss, and this, at least in theory, allows AI to identify instances of mis-pricing of assets, creating new opportunities to generate profit.

For example, AI systems can be trained using historical gold and silver price data and market conditions to help understand current market pricing, and to predict future prices based on new information as it emerges. AI’s ability to process large amounts of data in real-time can potentially allow its users to capitalise on market developments more quickly than human analysis and trading alone.

And while these AI systems are increasingly being used to help individuals and companies analyse and trade the markets, the physical infrastructure needed to build advanced computer servers represents a bullish theme for industrial demand for the precious metals, gold, silver, platinum and palladium. Global manufacturing trends and their effect on precious metals are discussed further here: Global Manufacturing Trends & Effect on Precious Metals | Kinesis

How Can AI Be Used In Stock Trading?

AI systems can be used in various ways to assist in analysing both the precious metals markets themselves, and the share price of the relevant mining companies. It can do this in several ways:

Data analysis: AI can be used to draw upon vast amounts of data to help inform price forecasts or trading strategies, including supply and demand fundamentals, company reports, inflation and monetary policy, regulatory policy changes and other market conditions.

Trend analysis: AI can be trained to track technical market indicators such as moving averages and momentum indicators as well as other established analysis tools such as Relative Strength Index, Bollinger Bands, Elliott Wave theory and Fibonacci Retracement theory.

Regression models: AI systems can include regression models which attempt to forecast precious metals prices or relevant company share prices based on historical data. In some cases, AI systems have demonstrated better forecasting accuracy than traditional regression models, as outlined here: 5 AI Applications in Investing | The Motley Fool

Market sentiment: AI systems can help assess market sentiment by collecting news articles and social media posts to build up a picture of market sentiment in a more comprehensive way than a human analyst.

Portfolio optimisation: Professional money managers can deploy AI to assist in diversifying portfolios, helping to decide the optimal time to reallocate capital as market conditions change, as a way to help mitigate risk.

Future Trends in AI & Precious Metal Stocks

Precious metals prices are driven by a range of factors including wider economic growth, industrial consumption, central bank monetary policy, investor sentiment, broader long-term trends including the energy transition, geopolitical risk, inflation levels and public faith in fiat currencies. The impact of global economic indicators on precious metals are discussed here: Global Economic Indicators and the Impact on Precious Metals.

The surge in use of AI means that behind these short-term ups and downs of the market, precious metals are set to see a long-term growth in demand linked to the deployment of physical infrastructure needed in more powerful computer server systems and their individual electronic components.

At the same time, the emergence of AI will increasingly allow the technology to be utilised in a way that enhances trading strategies and risk management in the markets for precious metals.

What does all this mean for the stocks of precious metals mining companies? As well as its utility as a way to improve trading strategies for traders and investors in the metals and mining space, AI can also be used by the mining companies themselves.

This can include optimising mining operations through more efficient exploration, increased automation, maximising extraction, enhancing safety and boosting maintenance and operational performance. To take just one example, AI can be used to analyse centuries of core samples, helping mining companies make better judgements about geological deposits and allowing them to find profitable resources that were previous missed, as discussed here: How AI is revolutionising the mining industry | International Mining and Resources Conference (IMARC) (imarcglobal.com)

In summary, AI is not a panacea, and it faces numerous limitations. An over-reliance on the technology could pose risks for companies and individual investors, and the systems are only as good as the information that they can access and process. Other disadvantages include high costs, a lack of creativity and a lack of ethics – unless specifically trained to include them. With that in mind, perhaps the most powerful use of AI is a scenario where it is used to complement, rather than replace, human capabilities.

AI stocks and companies who rely on the technology are not immune from over-exuberance in the market, as has been seen before in the dot.com bubble and following crash in the late 1990s. However, as the saying goes, it is a foolish person who bets against technology. The constant incentive to compete and generate increased profits will certainly drive further advances in AI as well as new and novel ways to deploy it.

A Brave New World

Only a few years ago, there was a widely-held belief that computer systems could vastly computationally outperform humans, but would never be able to perform genuinely creative tasks, for example creating art or poetry. 

With the benefit of hindsight, those assumptions underestimated AI’s power, and the technology has only just started. In that context, we should not be surprised to see a few more barriers fall as AI’s capabilities continue to expand.

Frank’s experience covering the commodities markets spans 22 years, with a particular specialism in metals, carbon and energy markets. He has worked as a senior editor for S&P Global Commodity Insights (formerly Platts) and before this, at ICIS-LOR, a part of Reed Business Information (Reed Elsevier), where he covered the petrochemicals markets from 2003 to 2005.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.

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